• Chapter 1 •
Ricardian Model and
Extensions
1.1 The basic Ricardian model Appendix lA The general
of comparative advantage 3 validity of the principle of
1.2 Exten ion of the model 22 comparative advantage 43
1.3 Summary 43 Appendix IB Ricardian factor
endowment cheory 46
In section 1.1 of this chapter we consider the basic analytical relationships
of the Ricardian model. These provide the propositions for the law of
comparative advantage which states that a country will export that good in
which it has relative productivity advantage. This section also deals with
the basic propositions concerning the gains from trade. Section 1.2 then
considers some extensions of the basic model. It begins by identifying the
duality between relative commodity prices and relative wages, looks at
extensions through increasing the number of countries and goods, and
finally looks at the introduction of transportation costs. Section 1.3
summarises the discussion.
Two appendices at the end of the chapter extend the basic model even
further. Appendix 1A (p. 43) provides a generalisation of the principle of
comparative advantage. Appendix 1B (p. 46) introduces a different 'basic'
model, the Ricardian factor endowment model, in which the coutries are
differentiated by their relative endowments of different qualities of labour,
rather than productivities of the single labour type as in the basic
Ricardian model.
1 1.1 The basic Ricardian model of comparative
advantage
This section focuses on the classical or Ricardian theory of comparative
advantage as the means for the simplest examination of the basis for
international trade. 1 This model, as any other model, suffers from being
bounded by a number of restrictive assumptions (listed below) . Some of
these assumptions will be relaxed later in this chapter. Even with such
restrictions, however, the model proves to be very useful in outlining basic
M. Mikić, International Trade
© Mia Mikić 1998
4 The Origins of Trade
trade theory and production patterns, and in demonstrating the gains from
trade. Nevertheless, there are some defects in the model that could cause
more or less concern, depending on what we think this model's main aim
should be. If it is used with the aim of showing the pattern of international
trade, that is, if it is a 'positive' model, then the model suffers from two
weaknesses. The first comes from the fact that the model explains the trade
pattern on the basis of productivity differences between countries but does
not attempt to explain the source of such differences. The second is a
problem of indeterminacy of terms of trade or world prices. If, on the other
hand, the model is intended for a demonstration of the benefits from trade,
that is, as a 'normative' model, then we again encounter some problems.
The most important is that the model considers only one single (or one
Leontief composite) factor of production, and consequently sheds no light
regarding the income distributional effects of trade which have always
been the major source of protectionist demands.
The main assumptions on which the very basic model rests are:
(1) Labour is the only input into production.
(2) Total amount of labour in each country is fixed and all units of
labour are identical (homogeneous quality of work force).
(3) Labour is perfectly mobile between alternative uses as long as the
wage per hour is the same between industries.
(4) Labour is completely immobile internationally and as a result wages
differ between countries.
(5) Relative labour content is the sole determinant of the relative value
(price) of commodities (labour theory of value). That means that a
good embodying four hours of labour is four times as expensive as a
good embodying only one hour of labour.
(6) The level of technology is given for both countries, and differs
between them therefore providing the sole reason for productivity
differences.
(7) The production function has constant returns to scale. Thus,
marginal and average costs of production are constant. In terms
of productivity this means that output per labour hour (or labour
hours per unit of production of commodity) is constant regardless of
number of hours worked (or quantity produced).
(8) There is full employment.
(9) Pure (perfect) competition prevails in the internal markets and in
international trade.
(10) Transportation costs are zero.
o The pre-trade economy
Our trade tale begins to unfold in a very simplified version of the real
world. We start by first describing production and consumption condi-
M. Mikić, International Trade
© Mia Mikić 1998
